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Full Opinion
This appeal is from an order overruling the motion of O’Rourke Co., Inc., the seller, brought under sec. 802.06(2) (f), Stats.,
I.
Because this is an appeal from an order overruling a motion to dismiss the amended complaint,
The complaint further alleges that the seller is a corporation engaged in the business of developing and selling real estate; that it is experienced in matters of real estate; that it had owned and subdivided the area of real estate in which the subject lot is located; that it was offering the subject lot and other lots in the same area for public sale; that it is familiar with the particular area of real estate in which the lot is located; that the area is zoned residential and that the seller knew it was zoned residential.
The complaint further states that the buyer “was a stranger to the area”; that he was inexperienced in matters of real estate transactions; that he purchased the lot to construct a house; that he did not know of the existence of a well under the land surface hidden from view; that if he had known of the well, he either would not have purchased the property or would have purchased it at a lower price; that the well constituted a defective condition of the lot; that the well made the property worth less for residential purposes than he had been led to believe; that the well made the property unsuitable for building without added expense; and that
The buyer further alleges that he incurred additional expenses for water control and construction costs because of the well; that the sum of $2,722.04 was expended to attempt to stop the flow of water so that the subsoil would be suitable for building; and that the sum of $10,575 was “incurred with the builder due to change in plans necessitated by said condition and to correct the same.”
Additional allegations applicable to what is labeled in the complaint as the “first cause of action” are that the seller, through its agents, knew of the existence of the underground well and, in order to induce buyer to buy the land, “falsely and with intent to defraud,” failed to disclose this fact which it had a duty to disclose and which would have had a material bearing on the construction of a residence on the property.
Additional allegations applicable to what is labeled in the complaint as the “second cause of action” are that the seller, through its agents, knew or in the exercise of reasonable care should have known of the existence of the underground well; had the means to ascertain this fact; had a duty to ascertain and a duty to disclose this fact which would have had a material bearing on the construction of a residence on the property; and either knowingly or negligently breached its duty to the buyer in not informing the buyer of the underground well.
The buyer demands judgment on the first cause of action, or in the alternative, on the second cause of action, in the sum of $20,000.
The motion to dismiss for failure to state a claim, like the previously used demurrer, tests the legal sufficiency of the claim. The facts pleaded and all reasonable inferences from the pleadings are admitted to be true, but only for the purpose of testing the legal sufficiency of the claim, not for the purpose of trial. The pleadings are to be liberally construed with a view to substantial justice to the parties.
This court has recognized that misrepresentation is a generic concept separable into the three familiar tort classifications: intent (sometimes called fraudulent misrepresentation, deceit or intentional deceit), negligence and strict responsibility.
“The bases of responsibility in these three classifications of torts have at least three elements in common: (1) The representation must be of a fact and made by the defendant; (2) the representation of fact must be untrue; and (3) the plaintiff must believe such representation to be true and rely thereon to his damage. The classifications differ in several respects. In intentional deceit the defendant must either know the representation is untrue or the representation was made recklessly without caring whether it was true or false and with intent to deceive and induce the plaintiff to act upon it to the plaintiff’s pecuniary damage. In strict responsibility, the misrepresentation must be made on the defendant’s personal knowledge or under circumstances in which he necessarily ought to have known the truth or untruth of the statement and the defendant must have an economic interest in the transaction. Intent to deceive and good-faith belief in the truth of the representation are immaterial. In this classification the speaker is supposed to possess complete knowledge of the facts or could normally be expected to know them without investigation. Harper and McNeely, A Synthesis of The Law of Misrepresentation, 22 Minn. L. Rev. (1938), 939, at Note 12, p. 988. A person is therefore justified in expecting infallibility as to the representations of fact. In negligence, the defendant need only fail to exercise ordinary care in making a misrepresentation or in ascertaining the facts but like other cases of negligence, it requires a duty of care or a voluntary assumption of a duty.”
On appeal, the seller argues that the complaint fails to state a claim upon which relief can be granted for three reasons: First, the complaint does not state a claim for actionable intentional misrepresentation because, as a matter of law, the seller had no duty to disclose the existence of the well. Secondly, the complaint does not state a claim for actionable negligent misrepresentation
II.
We discuss first whether the complaint states a claim for intentional misrepresentation. Initially we observe, as did the seller, that the complaint does not allege the first two elements of the tort of intentional misrepresentation, namely that the seller made a representation of fact and that the representation was untrue. The gravamen of the wrong is the nature of the false words used and the reliance which they may reasonably induce. In lieu of these allegations of false words, the complaint recites that the seller failed to disclose a fact, the existence of the well. The general rule is that silence, a failure to disclose a fact, is not an intentional misrepresentation unless the seller has a duty to disclose.
“A person in a business deal must be under a duty to disclose a material fact before he can be charged with a failure to disclose. Restatement, 3 Torts, p. 117, sec. 551 (1), states the rule as follows: ‘One who fails to disclose to another a thing which he knows may justifiably induce the other to act or refrain from acting in a business transaction is subject to the same liability to the other as though he had represented the nonexistence of the matter which he has failed to disclose, if, but only if, he is under a duty to the other to exercise reasonable care to disclose the matter in question.’ ”8
The question thus presented in the case at bar is whether the seller had a duty to disclose to the buyer the existence of the well. If there is a duty to disclose, the seller incurs tort liability for intentional misrepresentation (i.e. the representation of the non-existence of the fact), if the elements of the tort of intentional misrepresentation are proved. See Whipp v. Iverson, supra, 43 Wis.2d at 169.
The question of legal duty presents an issue of law, and Justice Currie, writing for this court, has pointed out that when a court resolves a question of legal duty the court is making a policy determination. Fisher v. Simon, 15 Wis.2d 207, 211-212, 112 N.W.2d 705 (1961). To
“For more than two generations it has been repeated that there can be no duty toward an unborn child; now all of a sudden the cases on prenatal injury are going the other way. It used to be held that one who gets himself into danger owes no duty to a rescuer injured in saving him; now all at once the duty is there. It was once well-settled law that one who negligently made misrepresentations could owe no possible duty to a third person into whose hands they might come; there is now respectable authority that in some situations such a duty can be found. It was once the law that a landlord leasing a small shop for the admission of the public owed no duty to those who entered; all of the recent cases agree that the duty is clear.
“These are shifting sands, and no fit foundation. There is a duty if the court says there is a duty; the law, like the constitution, is what we make it. Duty is only a word with which we state our conclusion that there is or is not to he liability; it necessarily begs the essential question. When we find a duty, breach, and damage, everything has been said. The word serves a useful purpose in directing attention to the obligation to be imposed upon the defendant, rather than the causal sequence of event; beyond that it serves none. In the decision whether or not there is a duty, many factors interplay: The hand of history, our ideas of morals and justice, the convenience of administration of the rule, and our social ideas as to where the loss should fall. In the end the court will decide whether there is a duty on the basis of the mores of the community, ‘always keeping in mind the fact that we endeavor to make a rule in each case that will be practical and in keeping with the general understanding of mankind.’ ” (Emphasis supplied,,)9
The traditional legal rule that there is no duty to disclose in an arm’s-length transaction is part of the common law doctrine of caveat emptor which is traced to the attitude of rugged individualism reflected in the business economy and the law of the 19th century.
Under the doctrine of caveat emptor no person was required to tell all that he or she knew in a business transaction, for in a free market the diligent should not be deprived of the fruits of superior skill and knowledge lawfully acquired. The business world, and the law reflecting business mores and morals, required the parties to a transaction to use their faculties and exercise ordinary business sense, and not to call on the law to stand in loco 'parentis to protect them in their ordinary dealings with other business people.
“The picture in sales and in land deals is, in the beginning, that of a community whose trade is simple and face to face and whose traders are neighbors. The goods and the land were there to be seen during the negotiation and particularly in the case of land, everybody knew everybody’s land; if not, trade was an arm’s length proposition with wits matched against skill. Of course caveat emptor would be the rule in such a society. But caveat emptor was more than a rule of no liability; it was a philosophy that left each individual to his own devices with a minimum of public imposition of standards of fair practice. In the beginning the common law did grant relief from fraud and did recognize that if the seller made an express promise as to his product at the time of the sale he remained liable after the sale on this ‘collateral’ promise. Indeed covenants for title in the deed were such collateral promises which survived the sale.” Dunham, Vendor’s Obligation as to Fitness of Land for a Particular Purpose, 37 Minn. L.R. 108, 110 (1953).
Over the years society’s attitudes toward good faith and fair dealing in business transactions have undergone significant change, and this change has been reflected in the law. Courts have departed from or relaxed the “no duty to disclose” rule by carving out exceptions to the rule and by refusing to adhere to the rule when it works an injustice. Thus courts have held that the rule
On the basis of the complaint, the case at bar does not appear to fall into one of these well-recognized exceptions to the “no duty to disclose” rule. However, Dean Prosser has found a “rather amorphous tendency on the part of most courts toward finding a duty of disclosure in cases where the defendant has special knowledge or means of knowledge not open to the plaintiff and is aware that the plaintiff is acting under a misapprehension as
“In the present stage of the law, the decisions show a drawing away from this idea [that nondisclosure is not actionable], and there can be seen an attempt by many courts to reach a just result in so far as possible, but yet maintaining the degree of certainty which the law must have. The statement may often be found that if either party to a contract of sale conceals or suppresses a material fact which he is in good faith bound to disclose then his silence is fraudulent.
“The attitude of the courts toward nondisclosure is undergoing a change and ... it would seem that the object of the law in these cases should be to impose on parties to the transaction a duty to speak whenever justice, equity, and fair dealing demand it. This statement is made only with reference to instances where the party to be charged is an actor in the transaction. This duty to speak does not result from an implied representation by silence, but exists because a refusal to speak constitutes unfair conduct.” Fraud — Concealment and Nondisclosure, 15 Tex. L. Rev. 1, 31 (1936).
The test Dean Keeton derives from the cases to determine when the rule of nondisclosure should be abandoned
“[N]ote this telling statement by a leading text authority: ‘The law appears to be working toward the ultimate conclusion that full disclosure of all material facts must be made whenever elementary fair conduct demands it.’ [Prosser on Torts (2d ed. 1955) p. 535]
“In other words, if you have a sensitive conscience let it be your guide and you should have no difficulty. You are in the best position to decide whether ‘elementary fair conduct’ demands that you tell the buyer.
“Where the material facts unknown to the buyer have to do with a physical condition known to the agent but difficult for the buyer to find, certainly then there is*36 a duty to speak and tell the buyer about it.” Wisconsin Real Estate Law 4-6 (1976).
The draftsmen of the most recent Restatement of Torts (Second) (1977) have attempted to formulate a rule embodying this trend in the cases toward a more frequent recognition of a duty to disclose. Sec. 551(1) of the Restatement sets forth the traditional rule that one who fails to disclose a fact that he knows may induce reliance in a business transaction is subject to the same liability as if he had represented the nonexistence of the matter that he failed to disclose if, and only if, he is under a duty to exercise reasonable care to disclose the matter in question.
“l. The continuing development of modern business ethics has, however, limited to some extent this privilege to take advantage of ignorance. There are situations in which the defendant not only knows that his bargaining adversary is acting under a mistake basic to the transaction, but also knows that the adversary, by reason of the relation between them, the customs of the trade or other objective circumstances, is reasonably relying upon a disclosure of the unrevealed fact if it exists. In this type of case good faith and fair dealing may require a disclosure.
“It is extremely difficult to be specific as to the factors that give rise to this known, and reasonable, expectation of disclosure. In general, the cases in which the rule stated in Clause (e) has been applied have been those in which the advantage taken of the plaintiff’s ignorance is so shocking to the ethical sense of the community, and is so extreme and unfair, as to amount to a form of swindling, in which the plaintiff is led by appearances into a bargain that is a trap, of whose essence and sub*38 stance he is unaware. In such a case, even in a tort action for deceit, the plaintiff is entitled to be compensated for the loss that he has sustained.”
Section 551(2) (e) of the Restatement (Second) of Torts limits the duty to disclose to disclosure of those “facts basic” to the transaction. Comment j to sec. 551 differentiates between basic facts and material facts as follows:
“A basic fact is a fact that is assumed by the parties as a basis for the transaction itself. It is a fact that goes to the basis, or essence, of the transaction, and is an important part of the substance of what is bargained for or dealt with. Other facts may serve as important and persuasive inducements to enter into the transaction, but not go to its essence. These facts may be material, but they are not basic.”19
However, the draftsmen of the Restatement recognized that the law was developing to expand the duty to disclosure beyond the duty described in sec. 551.
“There are indications, also, that with changing ethical attitudes in many fields of modern business, the concept of facts basic to the transaction may be expanding and the duty to use reasonable care to disclose the facts may be increasing somewhat. This Subsection is not intended to impede that development.” Comment Z, Sec. 551, 3 Restatement (Second) of Torts (1977).
This court has moved away from the rule of caveat emptor in real estate transactions, as have courts in other states.
In Pines v. Perssion, 14 Wis.2d 590, 594, 595, 111 N.W. 2d 409 (1961), this court, while recognizing that a tenant is a purchaser of an estate in land and is subject to
In Fisher v. Simon, 15 Wis.2d 207, 112 N.W.2d 705 (1961), this court was faced with the issue of whether a builder-vendor should be liable for pecuniary damage caused by defective home construction due to his failure to exercise ordinary care. Unwilling to follow earlier cases holding that the contractor was not liable for injury arising from negligent construction after completion of the work and its acceptance by the owner, this court concluded that the policy of the law does not preclude recovery for damages resulting from the negligence of a builder-vendor.
An analysis of the cases of this jurisdiction and others indicates that the presence of the following elements is significant to persuade a court of the fairness and equity of imposing a duty on a vendor of real estate to disclose known facts: the condition is “latent” and not readily observable by the purchaser; the purchaser acts upon the reasonable assumption that the condition does (or does not) exist; the vendor has special knowledge or méans of knowledge not available to the purchaser; and the existence of the condition is material to the transac
The seller argues that public policy demands that we not abandon the traditional rule that no action lies against the seller of real estate for failure to disclose in an arm’s-length transaction.
The seller’s position is that imposing a duty to disclose on a vendor of real estate dealing at arm’s length with a purchaser would result in an element of uncertainty pervading real estate transactions; that there would be chaos if a vendor were subject to liability after parting with ownership and control of the property; that a rash of litigation would ensue; and that a purchaser could protect himself or herself by inspection and inquiry and by demanding warranties.
The seller’s arguments are not persuasive in light of the facts alleged in the complaint and our narrow holding in this case.
Where the vendor is in the real estate business and is skilled and knowledgeable and the purchaser is not, the purchaser is in a poor position to discover a condition which is not readily discernible, and the purchaser may justifiably rely on the knowledge and skill of the vendor. Thus, in this instant case a strong argument for imposing a duty on the seller to disclose material facts is this “re
In order to determine whether the complaint in the case at bar states a claim for intentional misrepresentation we hold that a subdivider-vendor of a residential lot has a duty to a “non-commercial” purchaser to disclose facts which are known to the vendor, which are material to the transaction, and which are not readily discernible to the purchaser. A fact is known to the vendor if the vendor has actual knowledge of the fact or if the vendor acted in reckless disregard as to the existence of the fact. This usage of the word “know” is the same as in an action for intentional misrepresentation based on a false statement. See Stevenson v. Barwineck, 8 Wis.2d 557, 99 N.W.2d 690 (1959); Whipp v. Iverson, 43 Wis.2d at 169, and 3 Restatement (Second) of Torts, secs. 526-529 (1977). A fact is material if a reasonable purchaser would attach importance to its existence or nonexistence in determining the choice of action in the transaction in question; or if the vendor knows or has reason to know that the purchaser regards or is likely to regard the matter as important in determining the choice of action, although a reasonable purchaser would not so regard it. See 3 Restatement (Second) of Torts, sec. 538 (1977). Whether the fact is or is not readily discernible will depend on the nature of the fact, the relation of the vendor and purchaser and the nature of the transaction.
The seller’s brief asserts that the well is not a material fact because it does not constitute a defective con
We turn now to the second cause of action, an action in negligence based on misrepresentation.
This court has held that liability for misrepresentation of a fact can be imposed on the speaker who fails to exercise reasonable care in making the representation. Stevenson v. Barwineck, 8 Wis.2d 557, 563, 564, 99 N.W. 2d 690 (1959).
However, in the case at bar, unlike the usual case of negligent misrepresentation, there is no allegation that the seller negligently disseminated false information; in the case at bar the allegation is that the seller negligently failed to disseminate material information. The complaint treats nondisclosure of a fact which the seller
The complaint appears to recite in the alternative (1) that the seller knew of the existence of the well or (2) that the seller had reasonable cause to know of the existence of the well, and that, in either event, the seller knowingly failed to disclose the information to the buyer or failed to exercise ordinary care in supplying the information to the buyer. As noted previously, the allegations in the intentional misrepresentation cause of action were, inter alia, that the seller knew of the existence of the well and intentionally failed to disclose the fact in order to induce the buyer to enter into the transaction.
We have frequently stated that in order to constitute a cause of action for negligence there must exist (1) a duty of care on the part of the defendant; (2) a breach of the duty; (3) a causal connection between the conduct and the injury; and (4) an actual loss or damage as a result of the injury. Coffey v. Milwaukee, 74 Wis.2d 526, 531, 247 N.W.2d 132 (1976).
The seller asserts that it had no duty of care to the buyer. We have frequently said that the concept of duty, as it relates to negligence cases, is inexorably interwoven with foreseeability. The duty of each person is to exercise ordinary care to refrain from any act which will cause foreseeable harm to another, to refrain from any act which creates an unreasonable risk to others. In Antoniewicz v. Reszczynski, 70 Wis.2d 836, 857, 236 N.W.2d 1 (1975), we described the standard of ordinary care used in negligence cases in Wisconsin, and we explained that if the action is negligent under the Wisconsin standard the question becomes one of cause which may include public policy factors:
*47 “. . . By such standard of ordinary care, we mean the standard that is used in all other negligence cases in Wisconsin. Typical of such formulations is that appearing in Osborne v. Montgomery (1931), 203 Wis. 223, 236, 234 N.W. 372. See also: Pfeifer v. Standard Gateway Theater, Inc. (1952), 262 Wis. 229, 55 N.W.2d 29; Schilling v. Stockel (1965), 26 Wis.2d 525, 133 N.W.2d 335. Under that test, as we have repeatedly stated, negligence is to be determined by ascertaining whether the defendant’s exercise of care foreseeably created an unreasonable risk to others. That test is to be applied at the negligence phase of the analysis to the world at large and not to the particular plaintiff. In this respect, our analysis of negligence does not follow the Cardoza majority opinion in Palsgraf v. Long Island R. R. Co. (1928), 248 N.Y. 339, 162 N.E. 99. We rather rely upon the Andrews dissenting rationale that, if the defendant has been negligent under that standard, the question is one of cause — substantial factor, i.e., cause in fact, and proximate cause, which may include policy factors that may exclude liability in the particular circumstances.
As Justice Connor Hansen explained for the court in Coffey v. Milwaukee, 74 Wis.2d 526, 540, 247 N.W.2d 132 (1976), an appeal from an order overruling demurrers, liability does not necessarily follow even when negligence and negligence as a cause in fact of injury are present. Public policy considerations may preclude liability. These public policy considerations are an element of legal cause, and the application of the public policy considerations is for the court to determine.
*48 “[N] egligence plus an unbroken sequence of events establishing cause-in-fact does not necessarily lead to a determination that the defendant is liable for the plaintiff’s injuries. The determination to not impose liability in instances where a negligent act has been committed and the act is a ‘substantial factor’ in causing the injury rests upon considerations of public policy.”
We have enumerated several public policy reasons for not imposing liability despite a finding of negligence as a causal factor producing injury:
“(1) The injury is too remote from the negligence; or (2) the injury is too wholly out of proportion to the culpability of the negligent tortfeasor; or (3) in retrospect it appears too highly extraordinary that the negligence should have brought about the harm; or (4) because allowance of recovery would place too unreasonable a burden on the negligent tortfeasor; or (5) because allowance of recovery would be too likely to open the way for fraudulent claims; or (6) allowance of recovery would enter a field that has no sensible or just stopping point.” Morgan v. Pennsylvania Gen’l Ins. Co., 87 Wis. 2d 723, 737, 275 N.W.2d 660 (1979); Stewart v. Wulf, 85 Wis.2d 461, 479, 271 N.W.2d 79 (1978).
Courts have imposed liability in negligence actions for personal injury or property damage caused by false statements or caused by nondisclosure. However, courts have been more reluctant to impose liability in negligence actions for misrepresentations causing pecuniary loss (not resulting from bodily harm or physical damage to property).
*49 “Where misrepresentations entail the foreseeability of physical harm and such harm in fact results, the ordinary rules of negligence have for some time been applied.1 Courts have been more reluctant, however, to impose liability on this basis where a misrepresentation leads solely to economic loss.2 The reason for the difference is that by and large the range of physical harm is more limited.3 In the field of economic harm, however, ‘[i]f liability for negligence exists, a thoughtless slip or blunder . . . may expose [defendants] to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.'4
Similarly, the draftsmen of the Restatement of Torts (Second), in discussing liability for information negligently supplied for the guidance of others in their business transactions, caution that the scope of liability for failing to exercise reasonable care in supplying correct information is not determined by the rules that govern liability for the negligent supplying of chattels that imperil the security of persons or property or other negligent misrepresentation that results in physical harm. When there is no intent to deceive, but only negligence, the fault of the maker of the misrepresentation is sufficiently less to justify a narrower responsibility for its consequences.
“The reason a narrower scope of liability is fixed for negligent misrepresentation than for deceit is to be found in the difference between the obligations of honesty and of care, and in the significance of this difference to the reasonable expectations of the users of information that is supplied in connection with commercial transactions. Honesty requires only that the maker of a representation speak in good faith and without consciousness of a lack of any basis for belief in the truth or accuracy of what he says. The standard of honesty is unequivocal and ascertainable without regard to the character of the transaction in which the information will ultimately be relied upon or the situation of the party relying upon it.*51 Any user of commercial information may reasonably expect the observance of this standard by a supplier of information to whom his use is reasonably foreseeable.
“On the other hand, it does not follow that every user of commercial information may hold every maker to a duty of care. . . .
“By limiting the liability for negligence of a supplier of information to be used in commercial transactions to cases in which he manifests an intent to supply the information for the sort of use in which the plaintiff’s loss occurs, the law promotes the important social policy of encouraging the flow of commercial information upon which the operation of the economy rests. The limitation applies, however, only in the case of information supplied in good faith, for no interest of society is served by promoting the flow of information not genuinely believed by its maker to be true.” Restatement (Second) of Torts, sec. 552, Comment a (1977). See also, Prosser, Law of Torts 704-710 (4th ed. 1971).
We need not decide at this time — and we do not decide at this time — whether the “second cause of action” of the complaint based on the theory of negligent misrepresentation for nondisclosure states a claim upon which relief could be granted. We have determined that the complaint states a claim for intentional misrepresentation and we need go no further.
Although in some cases this court has decided whether public policy precludes liability in negligence at the motion to dismiss stage, it has in many cases refused to decide the public policy question at the pleading stage of a case. We have stated that it is usually better practice to have a full factual resolution at trial before we evaluate the policy considerations involved. Morgan v. Pennsylvania Gen’l Ins. Co., 87 Wis.2d 723, 737, 738, 275 N.W.2d 660 (1979);